Question 6 (10 points)

Wallaby Company is considering replacing its current costing system with an ABC costing system. Work has been done to identify cost pools, activity drivers, and expected levels of activity for its Manufacturing Overhead Costs as follows: (The company produces two products, Basic and Deluxe).

Activity Cost Pool Activity Measure Estimated Cost Expected Activity Basic Deluxe Materials Handling Number of Parts $260,000 300,000 100,000 Machine Setups Number of Setups $240,000 400 1,600 Product Assembly # of finished units $400,000 70,000 30,000 Order Processing Number of Orders $300,000 500 1,000 Product Sustaining # of product types $ 50,000 1 1 Total Overhead $1,250,000 Required:

1. Calculate the activity rate for each cost pool.

2. Assume that the only product costs relate to the activities identified in the above table. Calculate the product costs for the Basic & Deluxe tools under the ABC costing system, and a selling price for Basic and Deluxe if the company uses a "cost plus" pricing model. Assume a 25% markup.

3. Assume that a plantwide rate is used to allocate overhead based on units produced. 70,000 Basic and 30,000 Deluxe were produced in the period. Calculate the overhead which would be allocated to the two products.

4. Very briefly, do you agree with using a plantwide rate in this case. Be brief, but "to the point".